Nostradamus for Projects (Part I): Building Predictability into your Enterprise

Predictability

Why is it the construction industry lags other sectors when it comes to productivity? Why are cost and schedule overruns the norm for engineering and construction projects?

The answer to these questions is complicated, as there are many factors that affect project outcomes. However, there is one critical factor that is often overlooked, but has a huge impact on returns and margins – Predictability.

What is predictability and why is it important?

Predictability is simply defined as knowing the outcome of an event as early as possible. For construction projects, we mostly focus on cost and schedule predictability. In order to have predictable projects you need early AND accurate forecasts.

To illustrate, consider projects A and B.

Predictability Project Comparison

 
  • Project A) Find out about a 20% overrun 20% into the project duration
  • Project B) Find out about a 20% overrun 80% into the project duration

Imagine instead your organization had highly predictable projects, like Project A. If you learn about an overrun 20% into the project duration versus 80%, you have ample time for course correcting action.

Keep in mind, this example is just one project. If you multiply this issue by hundreds or thousands of projects across your organization, you begin to see how important predictability is.

Construction Industry Institute Quote

An organization’s inability to accurately predict cost and schedule outcomes massively impacts the bottom line and management confidence, to say nothing of investor confidence. Given Wall Street speaks the language of predictability, executives in our industry must also attain fluency in predictability. Again, early knowledge of outcomes enables project teams to address project performance proactively to reduce cost and schedule variance.

Influencing Cost Over Project Lifecycle

 

You cannot eliminate all surprises, but the quicker you identify them the better chance you have to take action. Simply put, improved predictability breeds better project control and better financial outcomes.

What causes low predictability?

Tasked with Improving the Predictability of Accurate Project Outcomes, the Construction Industry Institute (CII) released findings  from its Research Team (RT) 291.

The research revealed that there were distinct and identifiable practices that affected predictability of projects. The research team categorized these practices as follows:

  1. Human behavior and organizational culture
  2. Project characteristics (project complexity, external influences, market conditions, project team)
  3. Forecasting practices (forecasting methods, forecasting data, contingency management, reporting)
  4. Management processes (project planning & execution, contracting, risk management, change management)

Somewhat surprisingly, the single most important factor in project overruns was found to be the people element, including a mix of leadership, competency and human behavior. RT-291 found evidence of systemic delays in reporting accurate cost and schedule variance, otherwise known as “the hockey stick effect,” named after the typical shape of curves depicting forecast change over time.

If you think about it, this makes sense.

Project teams are typically measured based on the outcome of a project i.e. the deviation of actual costs and schedule from planned. With outcome-centric evaluation, project teams will not feel compelled to become better predictors. Project managers express that the prediction of an overrun at completion raises concern, scrutiny, and suspicion from the home office. Therefore, project managers tend to adopt an optimistic and biased view toward the report of deviations with the hope that future corrective actions will effectively readdress performance. As a result, deviations tend to be reported very late in the project execution process (Back and Grau, “Four-casting for early predictability”).

Achieving high predictability

In order to increase the predictability of projects, executives must first and foremost address the human factor and culture within their organization. By institutionalizing and incentivizing proactive behaviors no longer driven by outcome-centric Variance Analysis but instead by Predictability Analysis.

CII introduced the Predictability Index to help organizations do just that. The predictability index measures a project team’s ability to accurately and timely predict cost and schedule performance by assessing three core competencies:

  1. Timeliness of forecasts
  2. Accuracy of forecasts
  3. Deviations at completion

CII has found that when organizations implement performance measurement based on predictability, deviations are reported earlier, root causes of issues can be identified sooner, corrective action can be taken to mitigate risk, and resources can be optimized across the organization.

Furthermore, organizations that measure and assess predictability are able to utilize predictability as a benchmarking metric. This allows them to analyze and track predictability against variables such as business unit, project size, geographic sector, team leadership etc. Additionally, the benchmarking of predictability performance is also perceived as a reinforcing message within itself, promoting behavioral shifts in the organization that emphasize trust, transparency, alignment, and timely disclosure of project performance information (Back and Grau).

Technology’s role in predictability

It’s no coincidence that in addition to productivity and predictability, the construction industry also lags other sectors in technology adoption. Deloitte notes that Construction invests just 1.5%  of revenue into IT, less than half of the average for all industries. Further, KPMG reported  that two-thirds of surveyed firms don’t use advanced data analytics to monitor project-related estimation and performance.

This void of technology has contributed to low predictability in the industry, as executives lack visibility and transparency into the project level to properly incentivize and drive predictability across the organization.

There is hope, however, as digital transformation is becoming a critical business initiative for organizations in the Engineering & Construction industry. Many firms are increasingly utilizing technology to successfully deliver projects and achieve performance targets. Digitization can extend the reach of an organization, improve management decisions, and drive efficiency throughout an enterprise.

Another benefit of technology is its ability to help track, analyze, and ultimately drive predictability. Technology can directly impact many of the practices that CII identified as distinctly correlated to predictability:

Project characteristics – technology helps you manage complex projects more efficiently, promotes more effective communication and collaboration between project teams and management, helps mitigate the impact of external influences, and in some cases, software can help directly measure and assess project teams based on predictability.

Forecasting practices – utilizing one software solution as a central hub for project data can help improve forecasting, making sure forecasts are based on consistent, accurate, and real-time information. In addition, reporting can be done much more quickly, and with less manual effort.

Management processes – software solutions can help make project planning, execution, and contract management more efficient and effective. The correct software will also improve risk and change management, and make sure that best practices are standardized throughout the organization. Solutions that integrate management processes with project controls provide the added benefit of making sure project delivery is aligned with organizational strategy, and that all data is accurate and consistent across the enterprise.

Human behavior and organizational culture – there are some solutions on the market that can even help with the human behavior and culture aspect of predictability. Software that leverages predictability indices can help organizations measure, track, and benchmark based on predictability. Shining a spotlight on predictability allows management to reward it, thus helping drive out “optimism bias.”

A digital transformation of your enterprise provides a great opportunity to increase the productivity of your organization. And since predictability is such a critical part of project and organizational success, it is very important to consider predictability as part of your digital transformation strategy.

For more information about how to deliver highly predictable projects as part of your digital transformation strategy, contact us.

 

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What the Star Wars Movies Can Teach Us About Project Controls

In case you’re one of the two people who hadn’t heard, there’s a new Star Wars movie opening this Friday. In the US, pre-orders for tickets have broken the previous record (Hunger Games) eight times over. A thousand shows sold out within 12 hours of tickets becoming available.

The excitement got us thinking about some of the messages offered by the movies that have come before: hope, good vs. evil, destiny, friendship, and yes, even project controls. Below we offer just a few of the lessons the movies can teach us about effective project controls and improving project performance.

“Stay on Target” with Regular Forecasts

Completing a capital project within sight of your original budget and deadlines is a lot like hitting a 2-meter exhaust port with proton torpedoes while being chased by a dark lord of the Sith. It’s pretty hard. You probably aren’t going to pull it off unless you have help. And since most of us can’t just close our eyes and trust in the Force, we need the tools to provide regular, accurate forecasts.

For a lot of projects, the stakeholders don’t know if a project is going to go over budget until it’s already gone over budget, sometimes even months after the project is completed. With the right forecasting tools, you’ll be able to predict where your project is going and make the necessary changes to line things back up.

Eliminate Subjectivity from Progress Measurement

From watching this scene, it’s pretty clear that Moff Jerjerrod is fudging the numbers and the Emperor is calling his bluff. You would think, with a project as massive as the Death Star, that the project owners would leverage some software tools to measure and report on progress. “I assure you”, in contrast, seems like the wrong approach when you want to ease the mind of someone who can suffocate you with a thought. If you want to make a strong case, make sure you have solid data backing you up. With an accurate measure of current progress, it’s relatively easy to make predictions about future performance. “I assure you, because of this minimal schedule variance,” is an approach that would probably extend an Imperial officer’s lifespan.

Having the data there also brings in the question of how easy it is for Jerjerrod to agree to double the efforts of the project teams. How hard were they working before? Is the cause of the delays due to labor efficiency? Can overtime solve his needs? The whole thing just sounds suspicious.

Watch Out For Scope Creep

Because of the time required to complete a large scale capital project, there’s plenty of opportunity for someone to come up with “just a little change” to add on. And while it can be hard to say no, it’s important that everyone involved understand the risks inherent with increasing scope.

The trouble, of course, with agreeing to one scope change, is that it can leave you vulnerable to additional scope changes. Effective change management is necessary for measuring the impact and designating clear responsibility.

Keep an Eye on Your Cash Flow

In the real world, you can’t just blast everyone who comes around to collect payment. A successful project depends on maximum visibility into both the sources of funding and when that funding needs to go out. How accurate is the time phasing of your costs?

This scene also raises questions about contract negotiation. Unless you’re doing business with a Hutt crime lord, you should be able to establish guidelines regarding liability. An Imperial cruiser is the smuggling equivalent of a force of nature, the cost of doing business. Who’s responsible for that cost? Are the terms clear?

May the Force Be With You

The force of project controls, that is! If you can think of any project controls words of wisdom in the movies we might have missed, please share them below.


Project Cost Control a Rising Concern for Oil and Gas Megaprojects

Project Controls Imperititive for complex and often overbudget megaprojects

Project complexity is growing. It’s a truth we’ve seen across a multitude of industries as projects become more ambitious, take on new technological challenges, and command stratospheric budgets (where a $10 billion capital expense is no longer surprising and can be dwarfed multiple times over by the world’s very largest endeavors).

A recent Wall Street Journal article entitled, “Big oil companies struggle to justify soaring project costs,” corroborates this growing complexity and cites the difficulty in containing costs with megaprojects that span years and face ongoing market changes. Factors that are driving complexity and cost are diverse, but can include items like:

  • Exchange rate fluctuations as projects utilize multiple currencies which can also be distinct from reporting and home currencies.
  • Underlying economic conditions affecting the viability of projects – from commodity price volatility to changing regulatory requirements
  • Rising labor costs as competition rises for a limited skillset and increasing productivity becomes essential
  • The need for collaboration on projects amongst competitors, as multiple players join forces and pool resources to embark on these gargantuan projects.

The result is seen in megaproject costs soaring 50% to even 300% of original budget. The article quotes Gary Fischer who leads Chevron’s 120-person cost controls and contract management group. These projects “are very fragile and totally unforgiving” indicating why the department has tripled in size in its efforts to complete megaprojects on time and on budget.

Why undertake “Elephant Projects” of this size and scope then, you may ask? It’s a key part of the growth strategy of many of the oil majors looking to boost production to replace aging fields. It’s a calculated risk, however, given the long lead times between capital expenses and when the revenue begins to flow.

Major oil companies, once seemingly impervious to project cost overruns which had paled in comparison to revenues the projects produce, are now directly impacted by the sheer cost of megaprojects and their negative impact on near-term profits.

To combat the megaproject complexity, organizations are implementing procedures and systems that offset the risks of overruns and combat the factors noted above. The intent is to add visibility into project performance and allow for greater agility to address issues that lead to overruns before they grow into billions in added expenses.

 

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